DIPLOMAT PHARMACY, INC., 10-Q filed on 5/8/2018
Quarterly Report
v3.8.0.1
Document and Entity Information - shares
3 Months Ended
Mar. 31, 2018
May 07, 2018
Document and Entity Information    
Entity Registrant Name Diplomat Pharmacy, Inc.  
Entity Central Index Key 0001610092  
Document Type 10-Q  
Document Period End Date Mar. 31, 2018  
Amendment Flag false  
Current Fiscal Year End Date --12-31  
Entity Current Reporting Status Yes  
Entity Filer Category Large Accelerated Filer  
Entity Common Stock, Shares Outstanding   74,132,806
Document Fiscal Year Focus 2018  
Document Fiscal Period Focus Q1  
v3.8.0.1
Condensed Consolidated Balance Sheets (Unaudited) - USD ($)
$ in Thousands
Mar. 31, 2018
Dec. 31, 2017
Current assets:    
Cash and equivalents $ 6,040 $ 84,251
Receivables, net 329,749 332,091
Inventories 194,755 206,603
Prepaid expenses and other current assets 13,410 11,125
Total current assets 543,954 634,070
Property and equipment, net 39,719 38,990
Capitalized software for internal use, net 31,719 36,520
Goodwill 835,633 832,624
Definite-lived intangible assets, net 375,001 392,011
Other noncurrent assets 5,883 6,208
Total assets 1,831,909 1,940,423
Current liabilities:    
Accounts payable 393,185 377,489
Rebates payable 32,032 35,974
Borrowings on line of credit 140,000 188,250
Short-term debt, including current portion of long-term debt 11,500 11,500
Accrued expenses:    
Compensation and benefits 14,460 9,584
Contingent consideration 7,100 8,100
Other 16,901 20,560
Total current liabilities 615,178 651,457
Long-term debt, less current portion 444,916 521,098
Deferred income taxes 13,820 14,367
Contingent consideration 4,000 4,000
Total liabilities 1,077,914 1,190,922
Commitments and contingencies (Note 10)
Shareholders' equity:    
Preferred stock (10,000,000 shares authorized; none issued and outstanding)
Common stock (no par value; 590,000,000 shares authorized; 74,082,806 and 73,871,424 issued and outstanding at March 31, 2018 and December 31, 2017, respectively) 621,853 619,235
Additional paid-in capital 40,902 38,450
Retained earnings 91,240 91,816
Total shareholders' equity 753,995 749,501
Total liabilities and shareholders' equity $ 1,831,909 $ 1,940,423
v3.8.0.1
Condensed Consolidated Balance Sheets (Unaudited) (Parenthetical) - $ / shares
Mar. 31, 2018
Dec. 31, 2017
Condensed Consolidated Balance Sheets    
Preferred stock, shares authorized 10,000,000 10,000,000
Preferred stock, shares issued 0 0
Preferred stock, shares outstanding 0 0
Common shares, par value (in dollars per share) $ 0 $ 0
Common shares, authorized shares 590,000,000 590,000,000
Common shares, issued shares 74,082,806 73,871,424
Common shares, outstanding shares 74,082,806 73,871,424
v3.8.0.1
Consolidated Statements of Operations (Unaudited) - USD ($)
$ in Thousands
3 Months Ended
Mar. 31, 2018
Mar. 31, 2017
Condensed Consolidated Statements of Operations    
Net sales $ 1,342,484 $ 1,078,740
Cost of sales (1,231,871) (993,691)
Gross profit 110,613 85,049
Selling, general and administrative expenses (101,922) (76,501)
Income from operations 8,691 8,548
Other (expense) income:    
Interest expense (10,427) (2,049)
Other 418 33
Total other expense (10,009) (2,016)
(Loss) income before income taxes (1,318) 6,532
Income tax benefit (expense) 868 (2,307)
Net (loss) income (450) 4,225
Less net loss attributable to noncontrolling interest   (142)
Net (loss) income attributable to Diplomat Pharmacy, Inc $ (450) $ 4,367
Net (loss) income per common share:    
Basic (in dollars per share) $ (0.01) $ 0.07
Diluted (in dollars per share) $ (0.01) $ 0.06
Weighted average common shares outstanding:    
Basic (in shares) 73,996,313 66,886,866
Diluted (in shares) 73,996,313 67,780,434
v3.8.0.1
Condensed Consolidated Statements of Cash Flows (Unaudited) - USD ($)
$ in Thousands
3 Months Ended
Mar. 31, 2018
Mar. 31, 2017
Cash flows from operating activities:    
Net (loss) income $ (450) $ 4,225
Adjustments to reconcile net (loss) income to net cash provided by operating activities:    
Depreciation and amortization 23,951 15,397
Net provision for doubtful accounts 2,322 2,784
Share-based compensation expense 3,161 972
Amortization of debt issuance costs 1,132 297
Deferred income tax (benefit) expense (547) 1,746
Contingent consideration payments (470)  
Other (3)  
Changes in operating assets and liabilities, net of business acquisitions:    
Accounts receivable 21 21,406
Inventories 11,903 14,819
Accounts payable 11,753 (20,640)
Other assets and liabilities (4,201) 3,289
Net cash provided by operating activities 48,572 44,295
Cash flows from investing activities:    
Expenditures for property and equipment   (26,532)
Expenditures for capitalized software for internal use (567) (1,285)
Payments to acquire businesses, net of cash acquired (2,302) (569)
Other 3 (43)
Net cash used in investing activities (2,866) (28,429)
Cash flows from financing activities:    
Net payments on line of credit (48,250) (33,537)
Payments on long-term debt (76,875) (1,500)
Proceeds from long-term debt   25,000
Proceeds from issuance of stock upon stock option exercises 1,909 2,799
Contingent consideration payments (530)  
Payments of debt issuance costs (171)  
Net cash used in financing activities (123,917) (7,238)
Net (decrease) increase in cash and equivalents (78,211) 8,628
Cash and equivalents at beginning of period 84,251 7,953
Cash and equivalents at end of period 6,040 16,581
Supplemental disclosures of cash flow information:    
Cash paid for interest 10,160 1,710
Cash refunded (paid) for income taxes $ 319 $ (117)
v3.8.0.1
Consolidated Statement of Changes in Shareholders' Equity (Unaudited) - USD ($)
$ in Thousands
Common Stock
Additional Paid-In Capital
Retained Earnings
Total
Balance at Dec. 31, 2017 $ 619,235 $ 38,450 $ 91,816 $ 749,501
Balance (in shares) at Dec. 31, 2017 73,871,424     73,871,424
Balance at Dec. 31, 2017 $ 619,235 38,450 91,816 $ 749,501
Balance (in shares) at Dec. 31, 2017 73,871,424     73,871,424
Changes in Shareholders' Equity        
Adoption of ASC Topic 606 (Note 3)     (126) $ (126)
Net loss     (450) (450)
Stock issued upon stock option exercises $ 2,461 (552)   1,909
Stock issued upon stock option exercises (in shares) 200,677      
Share-based compensation expense   3,161   3,161
Stock issued upon vesting of restricted stock units $ 157 (157)    
Stock issued upon vesting of restricted stock units (in shares) 10,705      
Balance at Mar. 31, 2018 $ 621,853 $ 40,902 $ 91,240 $ 753,995
Balance (in shares) at Mar. 31, 2018 74,082,806     74,082,806
v3.8.0.1
DESCRIPTION OF BUSINESS
3 Months Ended
Mar. 31, 2018
DESCRIPTION OF BUSINESS  
DESCRIPTION OF BUSINESS

 

1.DESCRIPTION OF BUSINESS

 

Diplomat Pharmacy, Inc. and its consolidated subsidiaries (the “Company”) is the largest independent provider of specialty pharmacy services in the United States of America (“U.S.”). The Company is focused on improving the lives of patients with complex chronic diseases while also delivering unique solutions for manufacturers, hospitals, payers and providers. The Company’s patient-centric approach positions it at the center of the healthcare continuum for treatment of complex chronic disease states, including oncology, specialty infusion therapy, immunology, hepatitis, multiple sclerosis and many other serious or long-term conditions. The Company operates as two reporting segments. The Specialty segment offers a broad range of innovative solutions to address the dispensing, delivery, dosing and reimbursement of clinically intensive, high-cost specialty drugs and a wide range of applications and the Pharmacy Benefit Management (“PBM”) segment provides services designed to help the Company’s customers reduce the cost and manage the complexity of their prescription drug programs. The Company dispenses to patients in all U.S. states and territories through its advanced distribution centers and manages centralized clinical call centers to deliver localized services on a national scale.

 

v3.8.0.1
BASIS OF PRESENTATION
3 Months Ended
Mar. 31, 2018
BASIS OF PRESENTATION  
BASIS OF PRESENTATION

 

2.BASIS OF PRESENTATION

 

Interim Unaudited Condensed Consolidated Financial Statements

 

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the U.S. (“U.S. GAAP”) and the applicable rules and regulations of the Securities and Exchange Commission (“SEC”) regarding interim financial reporting. Accordingly, they do not include all of the information and notes required by U.S. GAAP for complete financial statements. In the opinion of management, the interim financial statements include all adjustments of a normal recurring nature necessary for a fair presentation of the financial position, results of operations, cash flows and changes in shareholders’ equity. The results of operations for the three months ended March 31, 2018 are not necessarily indicative of the results that may be expected for the year ending December 31, 2018. These unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and related notes for the year ended December 31, 2017 included in the Company’s Annual Report on Form 10-K, which was filed with the SEC on March 1, 2018.

 

v3.8.0.1
NEW ACCOUNTING STANDARDS
3 Months Ended
Mar. 31, 2018
NEW ACCOUNTING STANDARDS  
NEW ACCOUNTING STANDARDS

 

3.NEW ACCOUNTING STANDARDS

 

Adoption of New Accounting Standards

 

Revenue

 

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers (Topic 606) (“Topic 606”), which supersedes the previous revenue recognition guidance under U.S. GAAP. The new standard focuses on creating a single source of revenue guidance for revenue arising from contracts with customers for all industries. The objective of the new standard is for companies to recognize revenue when it transfers the promised goods or services to its customers at an amount that represents what the company expects to be entitled to in exchange for those goods or services. In July 2015, the FASB issued ASU No. 2015-14, Revenue from Contracts with Customers (Topic 606) Deferral of the Effective Date, which deferred the effective date of Topic 606 by one year to annual reporting periods beginning after December 15, 2017 for public entities, though early adoption was permitted. Topic 606 permits two methods of adoption: retrospectively to each prior reporting period presented (full retrospective method), or retrospectively with the cumulative effect of initially applying the guidance recognized at the date of initial application (modified retrospective transition method). The new standard also includes a cohesive set of disclosure requirements intended to provide users of financial statements with comprehensive information about the nature, amount, timing and uncertainty of revenue and cash flows arising from a company’s contracts with customers.

 

On January 1, 2018, the Company adopted Topic 606 using the modified retrospective transition method. Therefore, the comparative financial information has not been restated and continues to be reported under the accounting standards in effect for those periods. The Company recognized the cumulative effect of initially applying the new revenue recognition standard on January 1, 2018 and recorded an after-tax adjustment of $126 to reduce beginning retained earnings. This cumulative adjustment relates to a shift in the timing of revenue recognition of dispensing prescription drugs for home delivery from the date the drugs are shipped under the Company’s previous accounting policy to the date the drugs are physically delivered (which better reflects when control transfers) under the new accounting policy adopted in connection with Topic 606. The effect of this change is not significant as there is a very short timeframe from the shipment date to the physical delivery date of the prescription drugs. Additionally, in the PBM segment, prior to the adoption of Topic 606, revenue related to certain contracts was previously recognized on a net basis as the Company was considered to be acting as an agent in the transactions. The Company reassessed the principal versus agent criteria under Topic 606 and determined under the new guidance that the Company is considered to be acting as principal in these transactions and, effective January 1, 2018, began to recognize revenue on a gross basis.

 

As a result of applying the modified retrospective transition method, the following condensed consolidated balance sheet line items were adjusted as of January 1, 2018:

 

 

 

As Reported

 

 

 

As Adjusted

 

 

 

December 31, 2017

 

Adjustment

 

January 1, 2018

 

Receivables, net

 

$

332,091

 

$

(6,483

)

$

325,608

 

Inventories

 

206,603

 

6,313

 

212,916

 

Total current assets

 

634,070

 

(170

)

633,900

 

Total assets

 

1,940,423

 

(170

)

1,940,253

 

Accrued expenses — Other

 

20,560

 

(44

)

20,516

 

Total current liabilities

 

651,457

 

(44

)

651,413

 

Total liabilities

 

1,190,922

 

(44

)

1,190,878

 

Retained earnings

 

91,816

 

(126

)

91,690

 

Total shareholders’ equity

 

749,501

 

(126

)

749,375

 

Total liabilities and shareholders’ equity

 

1,940,423

 

(170

)

1,940,253

 

 

The following table compares the reported condensed consolidated balance sheet, statement of operations and statement of cash flows as of and for the three months ended March 31, 2018 to the as adjusted amounts had the previous revenue accounting guidance remained in effect:

 

 

 

As Reported As of
and For the Three
Months Ended

 

 

 

As Adjusted As of
and for the Three
Months Ended

 

 

 

March 31, 2018

 

Adjustment

 

March 31, 2018

 

Condensed Consolidated Balance Sheet:

 

 

 

 

 

 

 

Receivables, net

 

$

329,749

 

$

8,382

 

$

338,131

 

Inventories

 

194,755

 

(8,085

)

186,670

 

Total current assets

 

543,954

 

297

 

544,251

 

Total assets

 

1,831,909

 

297

 

1,832,206

 

Accrued expenses — Other

 

16,901

 

78

 

16,979

 

Total current liabilities

 

615,178

 

78

 

615,256

 

Total liabilities

 

1,077,914

 

78

 

1,077,992

 

Retained earnings

 

91,240

 

219

 

91,459

 

Total shareholders’ equity

 

753,995

 

219

 

754,214

 

Total liabilities and shareholders’ equity

 

1,831,909

 

297

 

1,832,206

 

 

 

 

 

 

 

 

 

Condensed Consolidated Statement of Operations:

 

 

 

 

 

 

 

Net sales

 

$

1,342,484

 

$

(97,890

)

$

1,244,594

 

Cost of sales

 

(1,231,871

)

98,017

 

(1,133,854

)

Gross profit

 

110,613

 

127

 

110,740

 

Income from operations

 

8,691

 

127

 

8,818

 

(Loss) income before income taxes

 

(1,318

)

127

 

(1,191

)

Income tax benefit (expense)

 

868

 

(34

)

834

 

Net (loss) income

 

(450

)

93

 

(357

)

Net (loss) income attributable to Diplomat Pharmacy, Inc.

 

(450

)

93

 

(357

)

 

 

 

 

 

 

 

 

Condensed Consolidated Statement of Cash Flows:

 

 

 

 

 

 

 

Net (loss) income

 

$

(450

)

$

93

 

$

(357

)

Accounts receivable (change)

 

21

 

(8,382

)

(8,361

)

Inventories (change)

 

11,903

 

8,085

 

19,988

 

Other assets and liabilities (change)

 

(4,201

)

204

 

(3,997

)

 

See the Revenue section in Note 4 for additional disclosures required under Topic 606.

 

Derivatives and Hedging

 

In August 2017, the FASB issued ASU No. 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities (“ASU 2017-12”). ASU 2017-12 aligns hedge accounting with risk management activities and simplifies the requirement to qualify for hedge accounting. ASU 2017-12 is effective for annual periods beginning on or after December 15, 2018, including interim periods within those annual periods. Early adoption is permitted.

 

Effective January 1, 2018, the Company early adopted ASU 2017-12. There was no current impact to the Company as a result of this adoption.

 

Accounting Standards Issued But Not Yet Adopted

 

Leases

 

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842) (“ASU 2016-02”), requiring lessees to recognize a right-of-use asset and a lease liability for all leases (with the exception of short-term leases) at lease commencement date. ASU 2016-02 is effective for annual periods beginning on or after December 15, 2018, including interim periods within those annual periods. Early adoption is permitted. The Company is in the early stages of evaluating the impact that adopting ASU 2016-02 will have on its consolidated financial statements and/or notes thereto.

 

v3.8.0.1
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
3 Months Ended
Mar. 31, 2018
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES  
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

4.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Principles of Consolidation

 

The condensed consolidated financial statements include the accounts of Diplomat Pharmacy, Inc., its wholly-owned subsidiaries, and a 51 percent owned subsidiary, formed in August 2014, which the Company controlled and which was dissolved during the fourth quarter of 2017. An investment in an entity in which the Company owns less than 20 percent and does not have the ability to exercise significant influence is accounted for under the cost method.

 

All intercompany transactions and balances have been eliminated in consolidation.

 

Use of Estimates

 

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported therein. Due to the inherent uncertainty involved in making estimates, actual results reported in future periods may be based upon amounts that differ from these estimates.

 

Receivables, net

 

Receivables, net consisted of the following:

 

 

 

March 31,

 

December 31,

 

 

 

2018

 

2017

 

Trade receivables, net of allowances of $(23,026) and $(22,050), respectively

 

$

316,805

 

$

317,004

 

Rebate receivables

 

10,575

 

12,847

 

Other receivables

 

2,369

 

2,240

 

 

 

 

 

 

 

 

 

$

329,749

 

$

332,091

 

 

 

 

 

 

 

 

 

 

Trade receivables are stated at the invoiced amount. Trade receivables primarily include amounts due from clients, third-party pharmacy benefit managers and insurance providers and are based on contracted prices. Trade receivables are unsecured and require no collateral. Trade receivable terms vary by payer, but generally are due within 30 days after the sale of the product or performance of the service.

 

Rebate receivables are amounts due from pharmaceutical manufacturers related to drug purchases by participants of the various pharmacy benefit plans that the Company manages, a portion of which, depending on contract terms, are paid back to the Company’s customers.

 

Inventories

 

Inventories consist of prescription and over-the-counter drugs and are stated at the lower of cost or net realizable value. Cost is determined using the first-in, first-out method. Prescription drugs are returnable to the Company’s vendors and fully refundable before six months of expiration, and any remaining expired drugs are relieved from inventory on a quarterly basis.

 

Revenue

 

The following table disaggregates the Company’s net sales by major source:

 

 

 

Three Months Ended
March 31,

 

 

 

2018

 

2017

 

Oncology (Specialty)

 

$

686,897

 

$

608,282

 

Specialty Infusion (Specialty)

 

165,717

 

131,026

 

Immunology (Specialty)

 

135,599

 

138,051

 

Other (Specialty)

 

164,766

 

201,381

 

PBM

 

191,468

 

 

Inter-segment eliminations

 

(1,963

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

1,342,484

 

$

1,078,740

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Specialty Segment

 

The Company recognizes revenue from dispensing prescription drugs for home delivery at the time the drugs are physically delivered (when control transfers). Revenue from dispensing prescription drugs that are picked up by patients at an open-door or retail pharmacy location are recorded at prescription adjudication, which approximates the fill date. Each prescription claim is considered its own arrangement with the customer and is a performance obligation.

 

The Company accrues an estimate of fees, including direct and indirect remuneration fees (“DIR fees”), which are assessed or expected to be assessed by payers at some point after adjudication of a claim, as a reduction at the time revenue is recognized. Changes in the Company’s estimate of such fees are recorded as an adjustment to revenue when the change becomes known.

 

PBM Segment

 

The Company provides a pharmacy benefit management service, including mail order pharmacy and specialty pharmacy services, to its clients, which include Medicare Part D Plans, regional health Plans, self-insured clients and Medicaid Plans. The Company sells prescription drugs directly through its mail service dispensing pharmacy and indirectly through its contracted network of retail pharmacies. The Company recognizes revenue from the sale of prescription drugs by its mail order pharmacy service when the drugs are physically delivered (when control transfers) and by its retail pharmacy network when the claim is adjudicated. The Company’s pharmacy benefit management services are accounted for in a manner consistent with a master supply arrangement as there are no contractual minimum volumes and each prescription is considered a separate purchasing decision and distinct performance obligation transferred at a point in time. Pharmacy benefit management services performed in connection with each prescription claim are considered part of a single performance obligation which culminates in the dispensing of prescription drugs. The Company recognizes revenue using the gross method since the Company acts as principal in the arrangement, exercises pricing latitude and independently has a contractual obligation to pay its network pharmacy providers for benefits provided to its clients’ members, and assumes primary responsibility for fulfilling the promise to provide prescription drugs to its client plan members while also performing the related pharmacy benefit management services. The Company includes the total prescription price (drug ingredient cost plus dispensing fee) it has contracted with these clients as revenue, including member co-payments to pharmacies, and as cost of sales.

 

Net sales include (i) the portion of the price the client pays directly to the Company, net of any variable consideration including volume-related or other discounts paid back to the client, (ii) the price paid to the Company by client plan members for mail order prescriptions and the price paid to retail network pharmacies by client plan members for retail prescriptions and (iii) claims-based administrative fees. The Company records revenue net of manufacturer’s rebates which are earned by its clients based on their plan members’ utilization of brand-name formulary drugs. The Company estimates these rebates at period-end based on actual and estimate claims data and its estimates of manufacturers’ rebates earned by its clients. The Company adjusts against revenues its rebates payable to clients to the actual amounts paid when such adjustments become known. The Company also adjusts revenues for refunds owed to the clients resulting from pricing and performance guarantees against defined metrics.

 

Sales taxes are presented on a net basis (excluded from revenue and cost) for both segments.

 

v3.8.0.1
BUSINESS ACQUISITIONS
3 Months Ended
Mar. 31, 2018
BUSINESS ACQUISITIONS  
BUSINESS ACQUISITIONS

 

5.BUSINESS ACQUISITIONS

 

The Company accounts for its business acquisitions using the acquisition method as required by FASB Accounting Standards Codification Topic 805, Business Combinations. The Company ascribes significant value to the synergies and other benefits that do not meet the recognition criteria of acquired identifiable intangible assets. Accordingly, the value of these components is included within goodwill. The Company’s business acquisitions described below, except a portion of LDI (defined below), were treated as asset purchases for income tax purposes and the related goodwill resulting from these business acquisitions is deductible for income tax purposes. The results of operations for acquired businesses are included in the Company’s consolidated financial statements from their respective acquisition dates.

 

The assets acquired and liabilities assumed in the business combinations described below, including identifiable intangible assets, were based on their estimated fair values as of the acquisition date. The excess of purchase price over the estimated fair value of the net tangible and identifiable intangible assets acquired was recorded as goodwill. The allocation of the purchase price required management to make significant estimates in determining the fair values of assets acquired and liabilities assumed, especially with respect to identifiable intangible assets. These estimated fair values were based on information obtained from management of the acquired companies and historical experience and, with respect to the long-lived tangible and intangible assets, were made with the assistance of an independent valuation firm. These estimates included, but were not limited to, the cash flows that an asset is expected to generate in the future, and the cost savings expected to be derived from acquiring an asset, discounted at rates commensurate with the risks and uncertainties involved. For acquisitions that involved contingent consideration, the Company recognized a liability equal to the fair value of the contingent consideration obligation as of the acquisition date. The estimate of fair value of a contingent consideration obligation required subjective assumptions regarding future business results, discount rates and probabilities assigned to various potential business result scenarios. These estimates are preliminary and subject to change up to one year following each acquired entity’s respective acquisition date.

 

LDI Holding Company LLC

 

On December 20, 2017, the Company acquired LDI Holding Company LLC, doing business as LDI Integrated Pharmacy Services (“LDI”). LDI is a full-service PBM based in St. Louis, Missouri. LDI’s service offerings include URAC-accredited mail-order and specialty pharmacies, a national network of retail pharmacies and comprehensive clinical programs. The following table summarizes the consideration transferred to acquire LDI:

 

Cash

 

$

521,300

 

4,113,188 restricted common shares

 

79,088

 

 

 

 

 

 

 

$

600,388

 

 

 

 

 

 

 

The above share consideration at closing is based on 4,113,188 shares, in accordance with the purchase agreement, multiplied by the per share closing market price of the Company’s common stock as of December 19, 2017 ($20.24) and multiplied by 95 percent to account for the restricted nature of the shares.

 

Approximately $7,500 of the purchase consideration was deposited into an escrow account to satisfy any indemnification claims that may be made by the Company. Approximately $5,200 was released to the sellers from escrow in March 2018.

 

The Company incurred acquisition-related costs of $391 which were charged to “Selling, general and administrative expenses” during the three months ended March 31, 2018.

 

The following table summarizes the preliminary fair values of identifiable assets acquired and liabilities assumed at the acquisition date:

 

Cash

 

$

780

 

Accounts receivable

 

38,028

 

Inventories

 

2,857

 

Prepaid expenses and other current assets

 

750

 

Property and equipment

 

3,025

 

Capitalized software for internal use

 

425

 

Definite-lived intangible assets

 

201,523

 

Other noncurrent assets

 

148

 

Accounts payable

 

(39,530

)

Accrued expenses — compensation and benefits

 

(2,137

)

Accrued expenses — other

 

(1,948

)

Deferred income taxes

 

(31,173

)

 

 

 

 

Total identifiable net assets

 

172,748

 

Goodwill

 

427,640

 

 

 

 

 

 

 

$

600,388

 

 

 

 

 

 

 

As of March 31, 2018, the Company was still in the process of finalizing its LDI valuation and, therefore, the purchase price allocation should be considered preliminary. The preliminary purchase price allocation may be subject to further refinement upon finalization of fair valuing acquisition-date working capital, as well as completion of acquisition-related income tax assessment. The goodwill balance may be adjusted pending the completion of the valuation of the assets acquired and liabilities assumed as described above. To the extent that significant changes occur in the future, the Company will disclose such changes in the reporting period in which they occur.

 

Definite-lived intangible assets that were acquired and their respective useful lives are as follows:

 

 

 

Useful
Life

 

Amount

 

Customer relationships

 

10 years

 

$

184,973

 

Trade names and trademarks

 

4 years

 

16,550

 

 

 

 

 

 

 

 

 

 

 

$

201,523

 

 

 

 

 

 

 

 

 

Pharmaceutical Technologies, Inc.

 

On November 27, 2017, the Company acquired Pharmaceuticals Technologies, Inc., doing business as National Pharmaceutical Services (“NPS”). NPS is a full-service PBM based in Omaha, Nebraska. The following table summarizes the consideration transferred to acquire NPS:

 

Cash

 

$

34,895

 

835,017 restricted common shares

 

12,753

 

 

 

$

47,648

 

 

The above share consideration at closing is based on 835,017 shares, in accordance with the purchase agreement, multiplied by the per share closing market price of the Company’s common stock as of November 24, 2017 ($16.97) and multiplied by 90 percent to account for the restricted nature of the shares.

 

Approximately $9,005 of the purchase consideration was deposited into an escrow account to be held for 12 months after the closing date to satisfy any indemnification claims that may be made by the Company.

 

The Company incurred acquisition-related costs of $553 which were charged to “Selling, general and administrative expenses” during the three months ended March 31, 2018.

 

The following table summarizes the preliminary fair values of identifiable assets acquired and liabilities assumed at the acquisition date:

 

Cash

 

$

9,851

 

Accounts receivable

 

20,622

 

Inventories

 

200

 

Prepaid expenses and other current assets

 

650

 

Property and equipment

 

13,545

 

Capitalized software for internal use

 

1,800

 

Definite-lived intangible assets

 

6,720

 

Accounts payable

 

(22,850

)

Accrued expenses — compensation and benefits

 

(160

)

Accrued expenses — other

 

(4,886

)

 

 

 

 

Total identifiable net assets

 

25,492

 

Goodwill

 

22,156

 

 

 

 

 

 

 

$

47,648

 

 

 

 

 

 

 

As of March 31, 2018, the Company was still in the process of finalizing its NPS valuation and, therefore, the purchase price allocation should be considered preliminary. The preliminary purchase price allocation may be subject to further refinement upon finalization of fair valuing acquisition-date working capital. The goodwill balance may be adjusted pending the completion of the valuation of the assets acquired and liabilities assumed as described above. To the extent that significant changes occur in the future, the Company will disclose such changes in the reporting period in which they occur.

 

Definite-lived intangible assets that were acquired and their respective useful lives are as follows:

 

 

 

Useful
Life

 

Amount

 

Customer relationships

 

10 years

 

$

5,900

 

Trade names and trademarks

 

2 years

 

820

 

 

 

 

 

 

 

 

 

 

 

$

6,720

 

 

 

 

 

 

 

 

 

Focus Rx Pharmacy Services Inc. and Focus Rx Inc.

 

On September 1, 2017, the Company acquired Focus Rx Pharmacy Services Inc. and Focus Rx Inc. (collectively, “Focus”), a specialty pharmacy focusing on infusion services located in Ronkonkoma, New York. The following table summarizes the consideration transferred to acquire Focus:

 

Cash

 

$

17,252

 

374,297 restricted common shares

 

5,643

 

Contingent consideration at fair value

 

2,080

 

 

 

 

 

 

 

$

24,975

 

 

 

 

 

 

 

The above share consideration at closing is based on 374,297 shares, in accordance with the purchase agreement, multiplied by the per share closing market price of the Company’s common stock as of August 31, 2017 ($16.75) and multiplied by 90 percent to account for the restricted nature of the shares.

 

The purchase price includes a contingent consideration arrangement that requires the Company to pay the former owners additional cash payouts of up to $1,500 per performance period based upon the achievement of certain gross profit targets in each of the 12-month periods ending September 30, 2018 and 2019. The maximum additional cash payout is $3,000.

 

Approximately $1,200 of the purchase consideration was deposited into an escrow account to be held for 12 months after the closing date to satisfy any of the Company’s indemnification claims.

 

The following table summarizes the preliminary fair values of identifiable assets acquired and liabilities assumed at the acquisition date:

 

Cash

 

$

1,809

 

Accounts receivable

 

4,954

 

Inventories

 

1,178

 

Definite-lived intangible assets

 

7,100

 

Other noncurrent assets

 

22

 

Accounts payable

 

(5,122

)

Accrued expenses — compensation and benefits

 

(156

)

 

 

 

 

Total identifiable net assets

 

9,785

 

Goodwill

 

15,190

 

 

 

 

 

 

 

$

24,975

 

 

 

 

 

 

 

As of March 31, 2018, the Company was still in the process of finalizing its Focus valuation and, therefore, the purchase price allocation should be considered preliminary. The preliminary purchase price allocation may be subject to further refinement upon finalization of fair valuing acquisition-date working capital. The goodwill balance may be adjusted pending the completion of the valuation of the assets acquired and liabilities assumed as described above. To the extent that significant changes occur in the future, the Company will disclose such changes in the reporting period in which they occur.

 

Definite-lived intangible assets that were acquired and their respective useful lives are as follows:

 

 

 

Useful
Life

 

Amount

 

Patient relationships

 

7 years

 

$

3,700

 

Non-compete employment agreements

 

3 years

 

2,200

 

Trade names and trademarks

 

3 years

 

1,200

 

 

 

 

 

 

 

 

 

 

 

$

7,100

 

 

 

 

 

 

 

 

 

Accurate Rx Pharmacy Consulting, LLC

 

On July 5, 2017, the Company acquired Accurate Rx Pharmacy Consulting, LLC (“Accurate”), a specialty pharmacy focusing on infusion services located in Columbia, Missouri. The following table summarizes the consideration transferred to acquire Accurate:

 

Cash

 

$

9,408

 

131,108 restricted common shares

 

1,776

 

Contingent consideration at fair value

 

1,980

 

 

 

 

 

 

 

$

13,164

 

 

 

 

 

 

 

The above share consideration at closing is based on 131,108 shares, in accordance with the purchase agreement, multiplied by the per share closing market price of the Company’s common stock as of July 3, 2017 ($15.05) and multiplied by 90 percent to account for the restricted nature of the shares.

 

The purchase price includes a contingent consideration arrangement that requires the Company to pay the former owners additional cash payouts of up to $3,600 per performance period based upon the achievement of certain gross profit targets in each of the 12-month periods ending July 31, 2018 and 2019. The maximum additional cash payout is $7,200.

 

Approximately $1,000 of the purchase consideration was deposited into an escrow account to be held for 15 months after the closing date to satisfy any of the Company’s indemnification claims.

 

The following table summarizes the fair values of identifiable assets acquired and liabilities assumed at the acquisition date:

 

Cash

 

$

1,295

 

Accounts receivable

 

2,196

 

Inventory

 

936

 

Prepaid expenses and other current assets

 

34

 

Definite-lived intangible assets

 

3,420

 

Other noncurrent assets

 

3

 

Accounts payable

 

(3,303

)

Accrued expenses — compensation and benefits

 

(152

)

Accrued expenses — other

 

(6

)

 

 

 

 

 

 

 

 

Total identifiable net assets

 

4,423

 

Goodwill

 

8,741

 

 

 

 

 

 

 

 

 

 

 

$

13,164

 

 

 

 

 

 

 

 

 

 

 

 

Definite-lived intangible assets that were acquired and their respective useful lives are as follows:

 

 

 

Useful
Life

 

Amount

 

Patient relationships

 

7 years

 

$

2,100

 

Non-compete employment agreements

 

5 years

 

670

 

Trade names and trademarks

 

3 years

 

650

 

 

 

 

 

 

 

 

 

 

 

$

3,420

 

 

 

 

 

 

 

 

 

WRB Communications, LLC

 

On May 8, 2017, the Company acquired WRB Communications, LLC (“WRB”), a communications and contact center company based in Chantilly, Virginia that specializes in relationship management programs for leading pharmaceutical manufacturers and service organizations. The following table summarizes the consideration transferred to acquire WRB:

 

Cash

 

$

26,804

 

299,325 restricted common shares

 

4,291

 

Contingent consideration at fair value

 

530

 

 

 

 

 

 

 

$

31,625

 

 

 

 

 

 

 

The above share consideration at closing is based on 299,325 shares, in accordance with the purchase agreement, multiplied by the per share closing market price of the Company’s common stock as of May 5, 2017 ($15.93) and multiplied by 90 percent to account for the restricted nature of the shares.

 

The purchase price includes a contingent consideration arrangement that requires the Company to pay the former owners additional cash payouts of up to $500 per performance period based upon the achievement of certain earnings before interest, taxes, depreciation and amortization targets in each of the 12-month periods ending May 31, 2018 and 2019. During the fourth quarter of 2017, the Company guaranteed a full payout to allow for the acceleration of certain integration activities. The formers owners received $1,000 in cash in January 2018.

 

Approximately $1,950 of the purchase consideration was deposited into an escrow account to be held for 18 months after the closing date to satisfy any of the Company’s indemnification claims.

 

The following table summarizes the fair values of identifiable assets acquired and liabilities assumed at the acquisition date:

 

Cash

 

$

1,018

 

Accounts receivable

 

2,593

 

Prepaid expenses and other current assets

 

179

 

Property and equipment

 

498

 

Definite-lived intangible assets

 

7,730

 

Other noncurrent assets

 

24

 

Accounts payable

 

(100

)

Accrued expenses — other

 

(498

)

 

 

 

 

Total identifiable net assets

 

11,444

 

Goodwill

 

20,181

 

 

 

 

 

 

 

$

31,625

 

 

 

 

 

 

 

Definite-lived intangible assets that were acquired and their respective useful lives are as follows:

 

 

 

Useful
Life

 

Amount

 

Customer relationships

 

7 years

 

$

5,200

 

Non-compete employment agreements

 

4 years

 

1,530

 

Trade names and trademarks

 

2 years

 

1,000

 

 

 

 

 

 

 

 

 

 

 

$

7,730

 

 

 

 

 

 

 

 

 

Comfort Infusion, Inc.

 

On March 22, 2017, the Company acquired Comfort Infusion, Inc. (“Comfort”), a specialty pharmacy and infusion services company based in Birmingham, Alabama that specializes in intravenous immune globulin therapy to support patients’ immune systems. The following table summarizes the consideration transferred to acquire Comfort:

 

Cash

 

$

10,613

 

Contingent consideration at fair value

 

3,800

 

 

 

 

 

 

 

$

14,413

 

 

 

 

 

 

 

The purchase price includes a contingent consideration arrangement that requires the Company to pay the former owners additional cash payouts of up to $2,000 per performance period based upon the achievement of certain gross profit targets in each of the 12-month periods ending March 31, 2018, 2019 and 2020. The maximum payout of contingent consideration is $6,000.

 

Approximately $1,050 of the purchase consideration was deposited into an escrow account to be held for 18 months after the closing date to satisfy any of the Company’s indemnification claims.

 

The Company incurred acquisition-related costs of $140 which were charged to “Selling, general and administrative expenses” during the three months ended March 31, 2017.

 

The following table summarizes the fair values of identifiable assets acquired and liabilities assumed at the acquisition date:

 

Cash

 

$

104

 

Accounts receivable

 

575

 

Inventories

 

118

 

Prepaid expenses and other current assets

 

15

 

Definite-lived intangible assets

 

2,400

 

Other noncurrent assets

 

5

 

Accounts payable

 

(372

)

Accrued expenses — other

 

(101

)

 

 

 

 

Total identifiable net assets

 

2,744

 

Goodwill

 

11,669

 

 

 

 

 

 

 

$

14,413

 

 

 

 

 

 

 

Definite-lived intangible assets that were acquired and their respective useful lives are as follows:

 

 

 

Useful
Life

 

Amount

 

Physician relationships

 

7 years

 

$

1,200

 

Non-compete employment agreements

 

5 years

 

1,200

 

 

 

 

 

 

 

 

 

 

 

$

2,400

 

 

 

 

 

 

 

 

 

Affinity Biotech, Inc.

 

On February 1, 2017, the Company acquired Affinity Biotech, Inc. (“Affinity”), a specialty pharmacy and infusion services company based in Houston, Texas that provides treatments and nursing services for patients with hemophilia. The following table summarizes the consideration transferred to acquire Affinity:

 

Cash

 

$

17,377

 

Contingent consideration at fair value

 

35

 

 

 

 

 

 

 

$

17,412

 

 

 

 

 

 

 

The purchase price includes a contingent consideration arrangement that requires the Company to pay the former owners an additional cash payout based upon the achievement of a certain earnings before interest, taxes, depreciation and amortization target in the 12-month period ending February 28, 2018. The maximum payout of contingent consideration is $4,000.

 

Approximately $2,000 of the purchase consideration was deposited into an escrow account to be held for 18 months after the closing date to satisfy any of the Company’s indemnification claims.

 

The Company incurred acquisition-related costs of $224 which were charged to “Selling, general and administrative expenses” during the three months ended March 31, 2017.

 

The following table summarizes the fair values of identifiable assets acquired and liabilities assumed at the acquisition date:

 

Cash

 

$

1,043

 

Accounts receivable

 

3,433

 

Inventories

 

79

 

Prepaid expenses and other current assets

 

74

 

Definite-lived intangible assets

 

5,100

 

Other noncurrent assets

 

5

 

Accounts payable

 

(1,075

)

Accrued expenses — compensation and benefits

 

(144

)

Accrued expenses — other

 

(25

)

 

 

 

 

Total identifiable net assets

 

8,490

 

Goodwill

 

8,922

 

 

 

 

 

 

 

$

17,412

 

 

 

 

 

 

 

Definite-lived intangible assets that were acquired and their respective useful lives are as follows:

 

 

 

Useful
Life

 

Amount

 

Patient relationships

 

7 years

 

$

4,000

 

Non-compete employment agreements

 

5 years

 

1,100

 

 

 

 

 

 

 

 

 

 

 

$

5,100

 

 

 

 

 

 

 

 

 

Pro Forma Operating Results

 

The following unaudited pro forma summary presents consolidated financial information as if the Accurate, Affinity, Comfort, Focus, LDI, NPS and WRB acquisitions had occurred on January 1, 2016. The unaudited pro forma results reflect certain adjustments related to the acquisitions, such as amortization expense resulting from intangible assets acquired and adjustments to reflect the Company’s borrowings and tax rates. Accordingly, such pro forma operating results were prepared for comparative purposes only and do not purport to be indicative of what would have occurred had the acquisitions been made as of the as if date or of results that may occur in the future.

 

 

 

Three Months
Ended

 

 

 

March 31, 2017

 

Net sales

 

$

1,197,903

 

 

 

 

 

 

Net loss attributable to Diplomat Pharmacy, Inc.

 

$

(1,537

)

 

 

 

 

 

Net loss per common share — basic & diluted

 

$

(0.02

)

 

 

 

 

 

 

v3.8.0.1
FAIR VALUE MEASUREMENTS
3 Months Ended
Mar. 31, 2018
FAIR VALUE MEASUREMENTS  
FAIR VALUE MEASUREMENTS

 

6.FAIR VALUE MEASUREMENTS

 

The Company utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs to the extent possible. Fair value is defined as the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. As such, fair value is a market-based measurement that should be determined based upon assumptions that market participants would use in pricing an asset or liability. As a basis for considering such assumptions, a three-tier fair value hierarchy was established, which prioritizes the inputs used in measuring fair value as follows:

 

Level 1:Observable inputs such as quoted prices in active markets;

 

Level 2:Inputs, other than quoted prices in active markets, that are observable either directly or indirectly; and

 

Level 3: Unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions.

 

An asset’s or liability’s fair value measurement level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. Valuation techniques used need to maximize the use of observable inputs and minimize the use of unobservable inputs.

 

Assets and liabilities measured at fair value are based on one or more of the following three valuation techniques:

 

A.Market approach: Prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities.

 

B.Cost approach: Amount that would be required to replace the service capacity of an asset (replacement cost).

 

C.Income approach: Techniques to convert future amounts to a single present amount based upon market expectations (including present value techniques, option-pricing and excess earnings models).

 

The following table presents the placement in the fair value hierarchy of assets and liabilities that are measured and disclosed at fair value on a recurring basis:

 

 

 

Asset /

 

Valuation

 

 

 

 

 

(Liability)

 

Level 3

 

Technique

 

March 31, 2018:

 

 

 

 

 

 

 

Contingent consideration

 

$

(11,100

)

$

(11,100

)

C

 

 

 

 

 

 

 

 

 

December 31, 2017:

 

 

 

 

 

 

 

Contingent consideration

 

$

(12,100

)

$

(12,100

)

C

 

 

The following table sets forth a roll forward of the Level 3 measurements for the three months ended March 31, 2018:

 

 

 

Contingent
Consideration

 

Balance at January 1, 2018

 

$

(12,100

)

Payments

 

1,000

 

 

 

 

 

Balance at March 31, 2018

 

$

(11,100

)

 

 

 

 

 

 

The carrying amounts of the Company’s financial instruments — consisting primarily of cash and cash equivalents, accounts receivable, accounts payable, and other liabilities — approximate their estimated fair values due to the relative short-term nature of the amounts. The carrying amount of debt approximates fair value due to variable interest rates at customary terms and rates the Company could obtain in current financing.

 

v3.8.0.1
GOODWILL AND DEFINITE-LIVED INTANGIBLE ASSETS
3 Months Ended
Mar. 31, 2018
GOODWILL AND DEFINITE-LIVED INTANGIBLE ASSETS  
GOODWILL AND DEFINITE-LIVED INTANGIBLE ASSETS

 

7.GOODWILL AND DEFINITE-LIVED INTANGIBLE ASSETS

 

The following table sets forth a roll forward of goodwill for the three months ended March 31, 2018:

 

Balance at January 1, 2018

 

$

832,624

 

Miscellaneous

 

3,009

 

 

 

 

 

Balance at March 31, 2018

 

$

835,633

 

 

 

 

 

 

 

Goodwill by reporting segment is as follows:

 

 

 

March 31,

 

December 31,

 

 

 

2018

 

2017

 

PBM

 

$

449,796

 

$

446,740

 

Specialty

 

385,837

 

385,884

 

 

 

 

 

 

 

 

 

$

835,633

 

$

832,624

 

 

 

 

 

 

 

 

 

 

Definite-lived intangible assets consisted of the following:

 

 

 

March 31, 2018

 

December 31, 2017

 

 

 

Gross
Carrying
Amount

 

Accumulated
Amortization

 

Net
Carrying
Amount

 

Gross
Carrying
Amount

 

Accumulated
Amortization

 

Net
Carrying
Amount

 

Customer relationships

 

$

196,073

 

$

(6,628

)

$

189,445

 

$

196,073

 

$

(1,141

)

$

194,932

 

Patient relationships

 

170,100

 

(54,304

)

115,796

 

170,100

 

(49,643

)

120,457

 

Non-compete employment agreements

 

61,389

 

(33,722

)

27,667

 

61,389

 

(30,560

)

30,829

 

Trade names and trademarks

 

44,020

 

(16,465

)

27,555

 

44,020

 

(13,624

)

30,396

 

Physician relationships

 

21,700

 

(7,162

)

14,538

 

21,700

 

(6,303

)

15,397

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

493,282

 

$

(118,281

)

$

375,001

 

$

493,282

 

$

(101,271

)

$

392,011

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Amortization expense for the three months ended March 31, 2018 and 2017 was $17,010 and $9,685, respectively.

 

v3.8.0.1
DEBT
3 Months Ended
Mar. 31, 2018
DEBT  
DEBT

 

8.DEBT

 

The Company had $473,125 and $550,000 in outstanding term loans as of March 31, 2018 and December 31, 2017, respectively. Unamortized debt issuance costs of $16,709 and $17,402 as of March 31, 2018 and December 31, 2017, respectively, are presented in the condensed consolidated balance sheets as direct deductions from the outstanding debt balances. The Company also had $140,000 and $188,250 outstanding on its line of credit as of March 31, 2018 and December 31, 2017, respectively. The Company had $110,000 and $61,750 available to borrow on its line of credit at March 31, 2018 and December 31, 2017, respectively.

 

The interest rates the Company pays under its credit facility are a function of a defined margin above LIBOR. The Company’s Term Loan A and Term Loan B interest rates were 4.38 percent and 6.10 percent, respectively, at March 31, 2018 and 4.04 percent and 6.04 percent, respectively, at December 31, 2017. The Company’s line of credit interest rate was 4.38 percent and 4.04 percent at March 31, 2018 and December 31, 2017, respectively. The Company is charged a monthly unused commitment fee ranging from 0.3 percent to 0.4 percent on the average unused daily balance on its $250,000 line of credit.

 

The Company’s credit facility contains certain financial and non-financial covenants. The Company was in compliance with all such covenants as of March 31, 2018 and December 31, 2017.

 

v3.8.0.1
SHARE-BASED COMPENSATION
3 Months Ended
Mar. 31, 2018
SHARE-BASED COMPENSATION  
SHARE-BASED COMPENSATION

 

9.SHARE-BASED COMPENSATION

 

A summary of the Company’s stock option activity as of and for the three months ended March 31, 2018 is as follows:

 

 

 

 

 

 

 

Weighted

 

 

 

 

 

 

 

Weighted

 

Average

 

 

 

 

 

 

 

Average

 

Remaining

 

Aggregate

 

 

 

Number

 

Exercise

 

Contractual

 

Intrinsic

 

 

 

of Options

 

Price

 

Life

 

Value

 

 

 

 

 

 

 

(Years)

 

 

 

Outstanding at January 1, 2018

 

6,108,292

 

$

18.62

 

8.5

 

$

25,777

 

Granted

 

330,135

 

20.68

 

 

 

 

 

Exercised

 

(200,677

)

9.51

 

 

 

 

 

Expired/cancelled

 

(443,167

)

21.91

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Outstanding at March 31, 2018

 

5,794,583

 

$

18.82

 

8.5

 

$

22,229

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Exercisable at March 31, 2018

 

1,503,271

 

$

18.68

 

7.2

 

$

9,632

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The Company recorded share-based compensation expense associated with stock options of $2,155 and $896 for the three months ended March 31, 2018 and 2017, respectively.

 

The Company granted service-based awards of 330,135 options to purchase common stock to key employees under its 2014 Omnibus Incentive Plan (the “2014 Plan”) during the first quarter of 2018, of which 225,135 and 105,000 options become exercisable in installments of 33.3 percent and 25 percent, respectively, per year, beginning on the first anniversary of the grant date.  These options have a maximum term of ten years.

 

The 330,135 options to purchase common stock that were granted during the three months ended March 31, 2018 have a weighted average grant date fair value of $8.42 per option. The grant date fair values of these stock option awards were estimated using the Black-Scholes-Merton option pricing model using the assumptions set forth in the following table:

 

Exercise price

 

$20.52 - $21.01

 

Expected volatility

 

36.06% - 38.15%

 

Expected dividend yield

 

0%

 

Risk-free rate for expected term

 

2.33% - 2.71%

 

Expected life (in years)

 

6.00 - 6.25

 

 

Estimating grant date fair values for employee stock options requires management to make assumptions regarding expected volatility of value of those underlying shares, the risk-free rate over the expected life of the stock options and the date on which share-based payments will be settled. Expected volatility is based on a weighted average of the Company’s historic volatility and an implied volatility for a group of industry-relevant healthcare companies as of the measurement date. Risk-free rate is determined based upon U.S. Treasury rates over the estimated expected option lives. Expected dividend yield is zero as the Company does not anticipate that any dividends will be declared during the expected term of the options. The expected term of options granted is calculated using the simplified method (the midpoint between the end of the vesting period and the end of the maximum term). Forfeitures are accounted for when they occur.

 

Restricted Stock Units (“RSU” or “RSUs”)

 

A summary of the Company’s RSU activity as of and for the three months ended March 31, 2018 is as follows:

 

 

 

 

 

Weighted

 

 

 

 

 

Average

 

 

 

Number

 

Grant Date

 

 

 

of RSUs

 

Fair Value

 

Outstanding at January 1, 2018

 

66,639

 

$

14.65

 

Granted

 

855,728

 

20.74

 

Vested and issued

 

(10,705

)

14.65

 

Expired/cancelled

 

(3,095

)

14.65

 

 

 

 

 

 

 

Outstanding at March 31, 2018

 

908,567

 

$

20.39

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Vested and unissued at March 31, 2018

 

21,203

 

$

23.27

 

 

 

 

 

 

 

 

 

The Company granted 716,216 service-based RSUs to key employees under its 2014 Plan during the first quarter of 2018. The value of an RSU is determined by the market value of the Company’s common stock at the date of grant. This value is recorded as compensation expense on a straight-line basis over the vesting period, which is three years for 646,867 of the granted RSUs and six months for the remaining 69,349 RSUs.

 

The Company also granted 139,512 performance-based RSUs to key employees under its 2014 Plan during the first quarter of 2018, which will be earned or forfeited based upon the Company’s performance relative to specified adjusted earnings before interest, taxes, depreciation and amortization goals for the year ending December 31, 2018. The earned RSUs, if any, will vest in three equal installments, with the first installment vesting upon the earlier of the date that the Company files its Annual Report on Form 10-K or Audit Committee confirmation of the satisfaction of the applicable performance goals, with the remaining installments vesting annually thereafter. The Company is accounting for these performance-based RSUs under the current presumption of 50 percent earned and 50 percent forfeited.

 

The Company recorded share-based compensation expense associated with RSUs of $868 and $0 for the three months ended March 31, 2018 and 2017, respectively.

 

Restricted Stock Awards (“RSA” or RSAs”)

 

A summary of the Company’s RSA activity as of and for the three months ended March 31, 2018 is as follows:

 

 

 

Number

 

Weighted

 

 

 

of Shares

 

Average

 

 

 

Subject to

 

Grant Date

 

 

 

Restriction

 

Fair Value

 

Nonvested at January 1, 2018

 

34,291

 

$

17.45

 

Vested

 

(2,560

)

14.65

 

 

 

 

 

 

 

Nonvested at March 31, 2018

 

31,731

 

$

17.68

 

 

 

 

 

 

 

 

 

Under the 2014 Plan, the Company issued RSAs to non-employee directors. The value of a RSA is determined by the market value of the Company’s common stock at the date of grant. The value of a RSA is recorded as share-based compensation expense on a straight-line basis over the vesting period, which is typically one year.

 

The Company recorded share-based compensation expense associated with RSAs of $138 and $76 for the three months ended March 31, 2018 and 2017, respectively.

 

v3.8.0.1
CONTINGENCIES
3 Months Ended
Mar. 31, 2018
CONTINGENCIES  
CONTINGENCIES

 

10.CONTINGENCIES

 

On November 10, 2016, a putative class action complaint was filed in the U.S. District Court for the Eastern District of Michigan against Diplomat Pharmacy, Inc. and certain officers of the Company. Following appointment of lead plaintiffs and lead counsel, an amended complaint was filed on April 11, 2017. The amended complaint alleges violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 in connection with public filings made between February 29, 2016 and November 2, 2016 (the “potential class period”). The plaintiff seeks to represent a class of shareholders who purchased stock in the potential class period. The complaint seeks unspecified monetary damages and other relief. The Company filed a motion to dismiss the amended complaint on May 24, 2017. The court issued an order denying the Company’s motion to dismiss on January 19, 2018. The Company filed a motion for reconsideration of its motion to dismiss on February 2, 2018. The Company believes the complaint and allegations to be without merit and intends to vigorously defend itself against the action. The Company is unable at this time to determine whether the outcome of the litigation would have a material impact on its results of operations, financial condition or cash flows.

 

On February 10, 2017, the Company’s Board of Directors (the “Board”) received a demand letter from a purported shareholder containing allegations similar to those contained in the putative class action complaint described above. The letter demanded that the Board take action to remedy the alleged violations. In response, the Board established a Special Independent Committee of its disinterested and independent members to investigate the claims. Subsequently, on June 2, 2017, the shareholder filed a putative shareholder’s derivative lawsuit in the Michigan Circuit Court for the County of Genesee regarding the same matters alleged in the demand letter. The complaint names the Company as a nominal defendant and names a number of the Company’s current and former officers and directors as defendants. The complaint seeks unspecified monetary damages and other relief. In connection with the ongoing Special Independent Committee investigation, on July 20, 2017, by agreement between the Company and the shareholder, the court ordered a stay of legal proceedings for 90 days, after which time by further agreement of the Company and the shareholder, the court has extended the stay until July 2, 2018. The Company is unable at this time to determine whether the outcome of the litigation would have a material impact on its results of operations, financial condition or cash flows.

 

The results of legal proceedings are often uncertain and difficult to predict, and the Company could from time to time incur judgments, enter into settlements, materially change its business practices or technologies or revise its expectations regarding the outcome of certain matters. In addition, the costs incurred in litigation can be substantial, regardless of the outcome.

 

The Company’s business of providing specialized pharmacy services and other related services may subject it to litigation and liability for damages in the ordinary course of business. Nevertheless, the Company believes there are no other legal proceedings, the outcome of which, if determined adversely to the Company, would individually or in the aggregate be reasonably expected to have a material adverse effect on its business, financial position, cash flows or results of operations.

 

v3.8.0.1
(LOSS) INCOME PER COMMON SHARE
3 Months Ended
Mar. 31, 2018
(LOSS) INCOME PER COMMON SHARE  
(LOSS) INCOME PER COMMON SHARE

 

11.(LOSS) INCOME PER COMMON SHARE

 

The following table sets forth the computation of basic and diluted (loss) income per common share:

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2018

 

2017

 

Numerator:

 

 

 

 

 

Net (loss) income attributable to Diplomat Pharmacy, Inc.

 

$

(450

)

$

4,367

 

 

 

 

 

 

 

Denominator:

 

 

 

 

 

Weighted average common shares outstanding, basic

 

73,996,313

 

66,886,866

 

Weighted average dilutive effect of stock options, RSAs and RSUs

 

 

893,568

 

 

 

 

 

 

 

Weighted average common shares outstanding, diluted

 

73,996,313

 

67,780,434

 

 

 

 

 

 

 

Net (loss) income per common share:

 

 

 

 

 

Basic

 

$

(0.01

)

$

0.07

 

Diluted

 

$

(0.01

)

$

0.06

 

 

The Company recognized a net loss for the three months ended March 31, 2018. As a result, the diluted loss per share is the same as the basic loss per share as any potentially dilutive securities would reduce the loss per share. In the absence of a net loss, service-based and earned performance-based stock options to purchase a weighted average of 4,011,211 common shares would have been excluded from the computation of diluted weighted average common shares outstanding for the three months ended March 31, 2018 as inclusion of such options would be anti-dilutive. Performance-based stock options to purchase up to a weighted average of 574,138 common shares would have been excluded from the computation of diluted weighted average common shares outstanding for the three months ended March 31, 2018 as all performance conditions were not satisfied as of March 31, 2018. Weighted average service-based RSUs of 51,553 common shares would have been excluded from the computation of diluted weighted average common shares outstanding for the three months ended March 31, 2018 as inclusion of such RSUs would be anti-dilutive. Weighted average performance-based RSUs of 7,751 common shares would have been excluded from the computation of diluted weighted average common shares outstanding for the three months ended March 31, 2018 as all performance conditions were not satisfied as of March 31, 2018.

 

Service-based and earned performance-based stock options to purchase a weighted average of 2,433,510 common shares were excluded from the computation of diluted weighted average common shares outstanding for the three months ended March 31, 2017 as inclusion of such options would be anti-dilutive. Weighted average RSAs of 2,560 common shares were excluded from the computation of diluted weighted average common shares outstanding for the three months ended March 31, 2017 as inclusion of such shares would be anti-dilutive.

 

v3.8.0.1
OPERATIONS BY REPORTING SEGMENT
3 Months Ended
Mar. 31, 2018
OPERATIONS BY REPORTING SEGMENT  
OPERATIONS BY REPORTING SEGMENT

 

12.OPERATIONS BY REPORTING SEGMENT

 

Effective January 1, 2018, the Company reports in two operating segments: Specialty and PBM. The Specialty segment offers a broad range of innovative solutions to address the dispensing, delivery, dosing and reimbursement of clinically intensive, high-cost specialty drugs and a wide range of applications and the PBM segment provides services designed to help the Company’s customers reduce the cost and manage the complexity of their prescription drug programs. The Company evaluates segment performance principally upon net sales and gross profit. Net sales, cost of sales and gross profit information by segment are as follows:

 

 

 

Three Months Ended March 31,

 

 

 

Net Sales

 

Cost of Sales

 

Gross Profit

 

 

 

2018

 

2017

 

2018

 

2017

 

2018

 

2017

 

Specialty

 

$

1,152,979

 

$

1,078,740

 

$

(1,059,924

)

$

(993,691

)

$

93,055

 

$

85,049

 

PBM

 

191,468

 

 

(173,910

)

 

17,558

 

 

Inter-segment eliminations

 

(1,963

)

 

1,963

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

1,342,484

 

$

1,078,740

 

$

(1,231,871

)

$

(993,691

)

$

110,613

 

$

85,049

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total assets by segment are as follows:

 

 

 

March 31,

 

December 31,

 

 

 

2018

 

2017

 

Specialty

 

$

1,109,656

 

$

1,190,188

 

PBM

 

722,253

 

750,235

 

 

 

 

 

 

 

 

 

$

1,831,909

 

$

1,940,423

 

 

 

 

 

 

 

 

 

 

v3.8.0.1
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Policies)
3 Months Ended
Mar. 31, 2018
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES  
Principles of Consolidation

 

Principles of Consolidation

 

The condensed consolidated financial statements include the accounts of Diplomat Pharmacy, Inc., its wholly-owned subsidiaries, and a 51 percent owned subsidiary, formed in August 2014, which the Company controlled and which was dissolved during the fourth quarter of 2017. An investment in an entity in which the Company owns less than 20 percent and does not have the ability to exercise significant influence is accounted for under the cost method.

 

All intercompany transactions and balances have been eliminated in consolidation.

 

Use of Estimates

 

Use of Estimates

 

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported therein. Due to the inherent uncertainty involved in making estimates, actual results reported in future periods may be based upon amounts that differ from these estimates.

 

Receivables, net

 

Receivables, net

 

Receivables, net consisted of the following:

 

 

 

March 31,

 

December 31,

 

 

 

2018

 

2017

 

Trade receivables, net of allowances of $(23,026) and $(22,050), respectively

 

$

316,805

 

$

317,004

 

Rebate receivables

 

10,575

 

12,847

 

Other receivables

 

2,369